"Dying" to save tax

It is often said that there are two certainties in life: death and taxes. It would appear that with the proverbial slip of the pen the South African legislature have provided unexpected tax relief to taxpayers - albeit after their death! (Click on the

Broadly, the Income Tax Act provides that where medical expenses are paid by the estate of a deceased taxpayer, the taxpayer is deemed to have paid the expenses on the day before his or her death.

The reason for this recent introduction in the Tax Act is the fact that only natural persons are entitled to deduct medical expenses. Medical expenses can only be deducted when paid, so in the absence of this provision, medical expenses incurred by the taxpayer before his death would not be deductible.

The thinking behind this piece of legislation cannot be faulted as it would be unfair if the taxpayer could not deduct his actual irrecoverable medical expenses, as appropriate. But, the draftsmans "slip" could now mean that expenses incurred by the taxpayer before his death are deductible while any subsequent recovery by the estate from the taxpayers medical aid are "free" from tax.

To illustrate the above anomaly (to the taxpayer's benefit - albeit deceased), assume the following facts. Mr Smith, dies age 70 on 15 October 2006. Prior to his death he incurred medical expenses of R400,000. Mr Smith's estate paid the R400,000 medical expenses and the estate recovered R350,000 from Mr Smiths medical aid.

Because of the application of the Income Tax Act, Mr Smith is deemed to pay R400,000 of medical expenses on 14 October 2006. If Mr Smiths taxable income for the period 1 March 2006 to date of death (i.e. 15 October 2006) was R1,000,000 his taxable income after medical expenses would only be R600,000.
It would not appear that the recovery of the R350,000 by the estate from Mr Smith's medical aid is taxable in the estate, or reduces the amount of the tax deduction which Mr Smith is entitled to.

The consequence of this is that effectively R350,000 may go "untaxed". At a tax rate of 40% this represents a tax saving of R140,000.

In today's society, with terminal illnesses such as cancer and the high medical costs associated with treating them, it is not unusual for people to incur heavy medical expenses just prior to their death. The tax effect of this anomaly can therefore be substantial. Probably not an area tax advisors would want to consider as a tax planning tool. But, advisors working with deceased estates may want to take specialist tax advice on this issue.

Written by Eugene Bendel, Bendels Consulting